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If you work in the nonprofit sector, you’re probably already familiar with the term “CSR,” or “Corporate Social Responsibility,” which often describes how companies incorporate social and environmental concerns into their business.
As SEC regulations change, CSR (which is an internal process) is being replaced by ESG, or “Environmental Social Governance.” This is a framework for reporting all the non-financial factors that create value, so investors can know how sustainable a company is and anticipate any potential risks. While the mere mention of the stock market might make your eyes glaze over, understanding ESG and its importance will benefit your nonprofit organization for years to come. This is particularly true as donor demographics are changing and socially-minded Gen Z and Millennial donors are having more impact on nonprofit donations.
Here’s what you should know about ESG so you don't get left behind.
ESG is a reporting framework that consists of three separate pillars: environmental, social and governance:
Environmental: Applies to risks associated with climate change, including air pollution, deforestation, water pollution, water scarcity, etc.
Social: Provides metrics for gender and diversity inclusion, labor relations, mental health of employees, community relations, data hygiene and security
Governance: Applies to your board of directors and its makeup, political contributions and lobbying, hiring, and onboarding best practices.
While many nonprofits already consider ESG when determining where the funds in their endowments are invested, this is only the beginning. The ESG framework can help your nonprofit set sustainability goals, improve donor retention, and help build social capital, as well as evaluate risk factors for potential partnerships and donors.
MORE: How to deal with negative ESG news coverage
The world is ever evolving, and while it might seem like an investment trend, ESG is here to stay. It’s rise grew out of the global increased focus on sustainability, a younger demographic whose investment and donation goals are guided by their commitment to social and environmental causes, and regulatory changes that are impacting both big corporations and nonprofits alike.
Furthermore, being aligned with ESG values can instill a sense of purpose in employees and help attract and retain better talent, while poor ESG can have negative effects on a work force. This is particularly impactful for nonprofits who are struggling with hiring and retention in the current job market.
ESG’s growing popularity is great news for nonprofits, which are generally aligned with ESG values. According to Changingourworld.com, 86% of Next Gen donors (Millennials and Gen Zers) agree nonprofits need to help solve the world’s biggest challenges, and 83% trust nonprofits more than for-profit corporations.
Including the ESG framework in your communications will send donors, potential donors and volunteers a strong message that your organization leads by example.
MORE: Why nonprofits should treat Gen Z donors as investments
First things first: Consider how your nonprofit organization is doing when evaluated with the ESG framework.
Do you use renewable energy? Is your board of directors diverse? Are your employees happy? What are your strengths and what are your weaknesses? Where is there room for improvement?
When answering these questions, it helps to quantify your efforts. For example, the American Red Cross tracks how likely a volunteer is to recommend them to their networks. Since 2016, volunteer net promoter score has improved 42%, a powerful number that proves to donors, potential donors, and potential volunteers that they are serious about retaining talent.
This helps to show how ESG creates value because retaining volunteers means less time and money recruiting new ones. As you are going through your assessment, be sure to consider how you can show the tangible impact of your ESG efforts. If there is a statistic that shows room for improvement, you can use this to create benchmark and demonstrate a plan to fix the issue.
After you’ve determined your strengths and weaknesses and what long-term goals you’d like to focus on, communicate that message to your networks, whether it be through social media, your newsletter, or meetings with your board.
By making your ESG goals clear, you not only prove you’re serious about moving toward a sustainable future, you give yourself more opportunities to promote your cause. For example, every time FedEx hits another milestone with their electric fleet, they can publicize that win. How exciting, to be another step closer to reaching that (very impressive) goal.
In addition, consider incorporating your ESG framework into funding proposals, especially for corporate funding and partnerships. Think of ESG when you’re looking at donor profiles. Who has an ESG need that your organization can fill? This could be a great way to grow your corporate donor base and form lasting partnerships.
MORE: How to fundraise for environmental organizations
Like being transparent with your internal ESG benchmarks and clearly communicating your ESG initiatives to your audience, shaping a donor due diligence strategy through the lens of ESG is paramount to your nonprofit’s success.
For example, you may be excited a generous gift from a donor and publicize their contribution only to later find out that the donor is linked to human rights violations or through their company. Now you not only have a public relations crisis on your hands, but you also risk losing your donor base, community, and putting your whole mission in jeopardy. All of this could have been avoided if you had done your donor due diligence.
Fortunately, screening tools like Nexis® for Development Professionals make it easy for you to validate your donors before you secure a partnership. This way you can avoid costly damage to your reputation.
ESG is only becoming more important to regulators, corporations, donors, and employees on the whole. Every minute you wait is a lost opportunity.
If you’re not sure where to begin, think about what you’re already doing. A nonprofit that funds creative writing programs in juvenile hall meets ESG’s social pillar, but it might be able to improve under the governance pillar by lobbying for the rights of detained youth or diversifying their board.
Set long-term goals for how you want to improve, making sure you’re always aligned with your organization’s values.
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Incorporating the ESG framework into your daily operations might not come naturally at first, but doing so can help your nonprofit reach its long-term goals.
Everything from fundraising to volunteer retention can be improved if you look at your organization with these standards in mind. This messaging should eventually be in all your communications, from social media to your monthly newsletter.
MORE: How nonprofits can do more with research
The rules of the game are changing, and while we’re seeing this first and foremost in the financial sector, the demand for more sustainable operations is only growing across industries.
Embracing ESG sends a strong signal that your organization has done the hard work of assessing your performance. You’re striving to do better and be better. This will only serve you better as your donor demographics shift.
This is new generation is looking to nonprofits to deliver on their promises. ESG is a long game with long-term goals. But when it’s done right, the rewards are limitless. For more insight on how to attract Gen-Z donors, check out our e-Book "Everything You Need to Know About Gen Z: Attracting a New Generation of Donors".
[1] Changing Our World, “Understanding the Next Generation.”